Can the AUDCAD go higher?

A few weeks ago I went long the AUDCAD with a couple of trades.  Unfortunately I did not Blog on those trades, but as I was reviewing all of my open trades this morning I figured why not Blog on the analysis I did on this trade as I worked on deciding if I should hold on to the positions or take my gains and walk away.  Stated differently: would the AUDCAD be a good buy today and can it go any higher?

The first analysis I did was on the trend line break.  As you can see from the chart above , the break is very solid, we are currently trading at around 0.8450, the take profit target of the trend line break is close to .9540 and at this point our stop loss should be around the trend line break or .8010, therefore we have a 1090 pips profit potential for a risk of 440 or a reward/risk ratio of 2.48.  This is an excellent reward/risk ratio in my book, I usually avoid any trades below 1.50 and anything above 2 I consider very good but you should definitly have you own Reward/Risk ratio rules based on your risk tolerance.  (Great topic for another post!)

My secondary analysis was on the RSI levels.  The RSI 14 is at 47.09 (Black line) and RSI 3 is at 80.77 (Blue Line).  From these numbers we can assume that the pair does still have room to go up.  The rule of thumb for RSI 14 is usually that the pair is overbought at when the RIS 14 is close to the 70 levels, which we are still far from.  For RSI 3, which I normally use when trading on shorter timeframes, we can easily go to the 90 levels and still trade higher so we do not have to worry about that one showing a sign of an overbought pair just yet.

Based on the above two trade analysis, I think the trade is safe to keep. (or enter today)  As a final analyss, I would also like to look into the Fibonacci numbers to see if I should add to my positions.  As you can see from the chart below, we've touched on the 38.2 levels twice already, I think the best entry point for additonal positions on this trade would be right above that level and eventually above the 61.8 level as well. 

To sum it all up, we have 1 trade and 2 potential trades to take on the AUDCAD. 

The current trade is a BUY@.8450.

First add-on trade is a BUY@.8495.

Second add-on trade is a BUY@.9010.

Using DeMark's TD Lines to identify trend line breaks.

As the Dollar strengthened and the Euro weakened over the past weeks and months, I've seen many posts online on forums and blogs questioning the move, trying to find justifications for the strength of the dollar given the weak U.S. economy and several theories thrown out there. The one thing many of these posts had in common is the awaited reversal, when will it happen and how far will it go.  As I look at the weekly chart for the EURUSD, there is a clear trend line break forming for the upside.  Is this the retracement everyone is looking for?  or will the break fade and never take place.   We can use DeMark's techniques to analyze the trend line break.

There are 4 DeMark qualifiers, only one is needed for a DeMark trendline break.  Lets take a quick look at each qualifier to see if the break is good or bad based on DeMark.

Qualifier 1: The price bar prior to an upside breakout must be a down close.

Simply said the current bar is green and we are looking for a break on the upside so there previous bar should be red.  In this case it is not.

Qualifier 2: The current price bar's open must be greater than both the current TD Supply Line and the previous price bar's close and must then trade at least one tick higher.

The open of the current candle is below the TD Supply Line (green line).  Qualifier is not met.

Qualifier 3: The previous price bar's close plus the previous bar's "buying pressure" must be below the current price bar's TD Supply Line price level.

To calculate the buying pressure, you subtract the low of the bar from the close of the bar.  In this case buying pressure is .0713, if we add that to the previous bar's close we get 1.4155 represented by the brown line on the chart.  Since we are above the TD Supply Line (green line) we can say that this qualifier is not met.

Qualifier 4: The current price bar's open must be above both the previous two price bars' closes, and the current price bar's TD Supply Line must be above the previous price bar's high.

The fourth qualifier is met, the current price bar's open is above the previous two closes and the TD Supply Line (green line) is well above the previous bar's high.

Based on the fourth qualifier, the trend line break is good and should be taken.  Entry point would be at the current price levels which is at 1.3715 right now, take profit target is at 1.54 (based on DeMark, I will go through the details on calculating that in a future blog).  As far as an exist strategy the TD Line method has 3 situations in which the trade should be closed:

1) Exit the trade if the bar after the breakout bar opens below the breakout price level.  

If the next bar open is below 1.3465, we should exit the trade.

2) Exit the trade if the bar after the breakout bar opens below the close of the breakout bar and closes below the breakout price level.

If the next bar closes below 1.3465 we should exit the trade.

3) Exit the trade if the bar after the breakout bar fails to exceed the high of the breakout price bar.

Currently the high of the breakout bar is 1.3727 but this might change as the week progresses.  If we do not reach a new high next week we should exit the trade.

For more details on the DeMark technique, do a google search on the Currency Trader magazine article called "Drawing objective trendlines: TD Lines" from September 2006 or pick up a copy of DeMark's books: "The New Science of Technical Analysis" or "DeMark and Day Trading". 

Range Trade on the EURUSD.

I have been watching the EURUSD for the past week as it makes its way from the 1.2770 levels to what seems to be the top of a range between 1.2430 and 1.3040. Today the pair finally briefly touched the roof of the range and if the range holds true, we should see a decline either today or tomorrow towards the floor of the range or at least towards the 1.2580 levels.

Another great indicator for a downturn which could also help us find the best time to enter a short trade is the trend line break or DeMark/Mouteki break.  For that we can take a look at a close view of the 4hr chart and see that a break could potentially happen in the next few candles, as it stands today that would be somewhere between 1.2900 and 1.2940.

If the range holds and the trend line is broken, we can be in this trade at the 1.2930, our stop loss can be set a little bit higher than the top of the range at around 1.3095 (165 pips risk), and our take profit can be set for 1.2650 (280 pips profit) or a trailing stop can be set when we reach that level as we can keep going to the bottom of the range to 1.2430 (500 pips profit).  

***** 12/11/08 Update *****

The EURUSD broke out of the top of the range I mentioned above at 1.3040, the pair is currently trading at 1.3250.  This price movement nullifies this range trade.  

Trade Results: no trade

Are good times for commodity currencies coming soon?

It is safe to say that most of us agree that the economy moves in cycles.  Although sometimes differently labeled those cycles are: Peak, Recession, Trough, Expansion and repeat.  Last week, the National Bureau of Economic Research declared that the U.S. has been in a recession for the past year.  (National Economic Trends 12/08) By doing a little bit of online research or remembering economics classes, you will find that historically, the best investments during a recession are in commodities, so there lies the question: Is this the time to go long commodity currencies?  Looking at the AUDUSD and USACAD weekly charts, it sure does seem like it and here is why.

If we look at the AUDUSD chart below, the pair had a beautiful run up from .4773 in April 2001 to .9847 in July 2008 which was followed with a decline to .6326 in October 2008.  That's right, it took the Aussie 4 months to give back close to 60% of its gains against the Dollar in over 7 years.  Now that the decline has slowed and the pair has been ranging for the past 8 weeks, I believe we have a very good opportunity for a reversal and a move up which will coincide with commodity strenght if the theory of commodities doing well in U.S recessions holds true.  The green line on the chart below represents a DeMark break or a trend-reversal trigger, it will most likely take another couple of weeks before the trade is ready for our investment but we will keep an eye on the pair over the next few weeks and see when the time will come.  As it stands today, the BUY opportunity will come at around 0.6820.

The Canadian chart shows a very similar story, decline from 1.6196 in December 2001 to .9056 November 2007 to just about a 56% retracement in October 2008 (to around 1.3015) and now a question of the existence of a sell opportunity?  The red line in the chart below indicates a point of trend reversal, unlike the Aussie, the Canadian seems to be ready for its reversal now.  The prime entry level for the pair is a short at 1.2450.

Will we see 120s for the GBPJPY?

Over the past few weeks I've been looking at the monthly chart of the GBPJPY and keep seeing how close we are to a 20+ years low for the pair.  January 1995 is when the pair made its lows of 129.32, what are the odds than in January 2009 we see the pair at the same or even lower levels? I think pretty good.  

The current monthly support level is standing at 134.94, the weekly is at around 137.80.  Over the past few weeks the GBPJPY has had several lows and bounced back from such lows as 138.99, 138.87, 137.65, the lowest of which came in today at 136.27.  Will this be the new low and a start of a major retracement upwards?  Or will the momentum pick up and the drop keep going to the lows of 1995?

From what we've seen from the charts, I think we are headed for new lows, that is why I am placing a sell at the 136 levels for the GBPJPY.

What are your thoughts?